Explanation

Step 1: Calculate the initial investment and margin

• Purchase price per share = $30
• Number of shares = 1,000
• Total purchase value = 1,000 × $30 = $30,000
• Margin requirement = 75% (meaning 25% is borrowed)
• Equity investment = 25% of $30,000 = $7,500
• Amount borrowed = 75% of $30,000 = $22,500

Step 2: Calculate the sale proceeds

• Sale price per share = $26
• Total sale value = 1,000 × $26 = $26,000

Step 3: Calculate the net profit/loss

• Repay the loan = $22,500
• Remaining after loan repayment = $26,000 - $22,500 = $3,500
• Initial equity = $7,500
• Net loss = Ending equity - Initial equity = $3,500 - $7,500 = -$4,000

Step 4: Calculate return on equity

• Return on equity = (Ending equity - Initial equity) / Initial equity
• Return on equity = (-$4,000) / $7,500 = -0.5333 = -53.33%

Wait, this doesn't match any options. Let me recalculate properly.

Actually, I need to reconsider the margin requirement. A 75% margin means the investor puts up 75% of the purchase price, not 25%.

Correct calculation:

• Margin = 75% means investor puts up 75% of purchase price
• Equity investment = 75% × $30,000 = $22,500
• Amount borrowed = 25% × $30,000 = $7,500

Sale proceeds:

• Total sale value = $26,000
• Repay loan = $7,500
• Remaining after loan repayment = $26,000 - $7,500 = $18,500

Return calculation:

• Initial equity = $22,500
• Ending equity = $18,500
• Loss = $18,500 - $22,500 = -$4,000
• Return on equity = (-$4,000) / $22,500 = -0.1778 = -17.78%

Therefore, the return on equity is approximately -17.8%, which matches option A.

Key points:

• Margin percentage refers to the investor's contribution (equity)
• Return on equity measures the return on the investor's own money
• The calculation shows how leverage amplifies both gains and losses